The consumer packaged goods industry has seen its revenues continue to increase throughout the financial crisis, but margins fell sharply and even with much of the world recovering it won’t be easy for CPG firms to cash in on that growth.
“Given that global CPG companies are selling more of their products to more people in more parts of the world, shouldn’t revenue growth—and, with it, healthy returns—be theirs for the taking?” write McKinsey & Co analysts Jim Brennan, Greg Kelly, and Anne Martinez.
The CPG industry has gone through four distinct phases over the last five decades: a period of strong growth at the expense of margins, a period of expanding margins, a wave of mergers and acquisitions, and then the slow growth and falling margins of the great recession.
Future of the CPG industry far from clear
The question is what the next phase of the CPG industry will look like. “Another golden age of growth could be in the making. Consumption growth, however, isn’t even; it’s happening much faster in certain categories and markets. Some emerging-market cities have higher growth potential than entire countries,” they write.
Even in developed countries there are pockets of growth that outpace EM markets, like the Hispanic community in the US that Colgate-Palmolive Company (NYSE:CL) is targeting with new product lines or the value segment that remains popular even as the economy recovers. But regardless of whether a company tries to branch out into high growth markets or settles for stable returns in familiar territory, it will need to be ready to deal with rising commodity prices.
Commodity price risk threatens margins
“The spike in commodity prices in the past 10 years has undone the decline of the previous 100 years,” write Brennan, Kelly, and Martinez. “Every CPG company must undertake a rigorous risk analysis—including an assessment of tail risks—for major commodities across its entire supply chain.”
Some companies are responding to the pressure that commodity risk puts on margins through new collaborations. The analysts identify 13 deals among Brazilian companies worth more than $500 million each, seven such deals in China, and another seven in Mexico, not to mention 51 deals of that size in the US. But CPG companies are also having to substitute ingredients, increase reliance on recycled goods, or even eliminate product lines because they simply have too much exposure to commodities with a constrained supply.
“CPG companies must prepare for continuing volatility in commodity costs,” they conclude. “The standard deviation of the McKinsey Global Institute (MGI) commodity-price index is more than twice its historical average.”